Gifting Highly appreciated stock

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Indy4Life's picture
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I have a client that in in his 70's and has about $120,000 worth of highly appreciated shares of a local company.  The basis is just about zero.  He does not need this money for himself.  He has 5 grandkids and wants to help them with college.  All the grandkids are between 3 and 12 years old.  My thought is to establish UGMA accounts for all 5 grandkids, transfer $12,000 worth of shares for 07 (annual gifting max) to each, and another $12,000 in January.  Each of the 5 would then have $24,000 of the stock in an UGMA by early next year.  As I understand it, if the shares are sold in the UGMA the first $850 of cap gains is exempt, the next $850 would be taxed at the child's rate (5% cap gains tax rate) and the remaining $22,300 of cap gain would be taxed at the parents rate (15% cap gains rate).  I then plan to open five 529 accounts and transfer UGMA proceeds to 529 accounts with the parents (not the grandparents) as owners.  In my state, the parents would receive a state tax deduction for this and all future taxation would be eliminated as long as they go to college. 
 
Have I missed anything here?  Is this how you all would do this?  Would the children have to file a 1040, or would it be taken care of on the parents forms?  Is there any other way to avoid the capital gains?

troll's picture
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Be careful. Is the client in good health? If he dies, and still owns the stock, his heirs will own the stock with a stepped up basis and can sell the stock with no gain.
 
Look at his estate tax situation. Is his estate worth more than $2MM? if not, then there is no estate tax and no reason to gift stock. Is he married? Like at the titling of the stock. Maybe there is an opportunity to do a spousal gift, if they dont each have $2MM to use their exclusions. Thus escaping all estate tax, and taking stepped up basis to the heirs therefore escaping all cap gains tax as well.
 

Indy4Life's picture
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Pratoman,
 
Thanks for the post.  I realize the tax advantages if he dies with the stock and how it steps up.  His estate is under $2MM, probably closer to $1MM.   It's titled joint now with his wife, I guess we could put it just in his name with a TOD agreement so it would get passed on to grandkids with a step up after his death and not him and his wife's death.  He seems to want to add to their college accounts now.  We also are trying to reduce the risk of having it all in one stock.  I was thinking about a protective put, but I'm not sure an option market exists for a small mid-western s&l bank stock.  His health is fair.

troll's picture
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I dont know if the position is big enough, because I've never done it, but ask your broker dealer if they do custom strategies, if so they could create a collar, if their are no publicly traded options on the stock.
Check tho, you never know, its amazing what the CBOE trades options on these days!

EDJ4now's picture
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Joined: 2006-02-08

If the money goes to an UGMA and then to a 529, it is still considered the child's money (it's technically illegal to open a 529 with UGMA money and not label it properly, whether you get caught is another question).  This leaves the 529 owned by the UGMA, which presents 2 problems.
1.  If any of the grandkids have a chance to qualify for financial aid, this could be a bad idea.  My numbers are from last year, but 35% of any money in the kid's name, including an UGMA account, count against financial aid, and only 5% of the parent's assets count.  0% of the grandparent's assets count. 
 
2.  The bigger problem with this strategy, and UGMA's in general in my opinion, is that on the child's 21st birthday, they can access the money and no one can exercise any control.  In most cases this isn't a big problem, but I always ask my clients to think back to some of the "prudent" decisions they made when they were 21.  Well over 90% reconsider doing an UGMA account after that conversation.  I started having this conversation after a more experienced FA told me about a client's daughter who emptied her $30,000 "college" account (which was an UGMA) to buy her boyfriend a new car.  Obviously not what the parents had in mind when the account was opened.  It ultimately cost the FA a good client.

advisorman's picture
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Joined: 2007-12-14

What is wrong with the grandparent just funding the 529s directly? He can gift directly into the 529s so there is no tax issue and can gift up to 5 times the yearly gift limit or $60,000 per 529. Please correct if I am wrong.

Indy4Life's picture
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Joined: 2006-02-04

Advisorman,
 
That was my first thought.  However, if he gifts direct to the 529's he would have to sell the shares first in his name and pay all the cap gains.  If he gifts to the UGMA's then the gain will be split 5 ways between his children/grandchildren and the first couple thousand of each gain would be exempt from taxation.  The only advantage of directly gifting to the 529's is the ability to accellerate the $12,000 per year to $60,000 but that only decreases his estate tax down the road and he is under $2MM anyway.
 
Anyone else have thoughts?  This is why I like this forum

Indy4Life's picture
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EDJ4Now:
 
First, congrads on leaving the cult.  I left 3 years ago and have never looked back.  Second, it is not illegal to move money from a UGMA to a 529 as long as the assets in the 529 are designated as former UGMA monies.  My state plan (Putnam in Ohio) will do this.  If I recall, EDJ would not allow this because the rules were foggy but there is no problem with it as long as the money is earmarked as such.

advisorman's picture
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Is there a way you could gift the shares without selling? I ask this for I am sure we all will run into this someday.

advisorman's picture
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Doing some research and EDJ4now is right on the mark with his comments.
 
I also found my own answer in that you cannot tranfer any assets to a 529 but cash.
 
I also found this article that does a great job on what you can and cannot do with 529s.
 
http://finance.yahoo.com/how-to-guide/college-education/18315

now_indy's picture
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Joined: 2006-07-28

As for having him hold the stock until he dies, keep in mind that (under the current laws) if he dies in 2010, the stock will NOT get the step up in basis. His family would have NO estate taxes to pay, but the stock would still have the large cap gains built into it.

Indy4Life's picture
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Advisorman,
 
Yes, you can transfer shares of stock from the grandparents account to the UGMA without selling.  The market value at time of transfer should be less than $12,000 to avoid gift tax consequences.  That said, you have to then sell the shares in the UGMA and contribute to the 529 via cash.  I have other correspondence that say this is allowed even though you and EDJ4Now disagree.

troll's picture
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Joined: 2004-11-29

Indy4Life wrote:EDJ4Now:
 
First, congrads on leaving the cult.  I left 3 years ago and have never looked back.  Second, it is not illegal to move money from a UGMA to a 529 as long as the assets in the 529 are designated as former UGMA monies.  My state plan (Putnam in Ohio) will do this.  If I recall, EDJ would not allow this because the rules were foggy but there is no problem with it as long as the money is earmarked as such.
However, the 529 designated as former UGMA money, retains most of the characterisitcs of an UGMA, i.e. irrevocable gift, etc.

troll's picture
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pratoman wrote:Indy4Life wrote:EDJ4Now:
 
First, congrads on leaving the cult.  I left 3 years ago and have never looked back.  Second, it is not illegal to move money from a UGMA to a 529 as long as the assets in the 529 are designated as former UGMA monies.  My state plan (Putnam in Ohio) will do this.  If I recall, EDJ would not allow this because the rules were foggy but there is no problem with it as long as the money is earmarked as such.
However, the 529 designated as former UGMA money, retains most of the characterisitcs of an UGMA, i.e. irrevocable gift, etc.Good point.  You one of them smarty pants CFP guys?

troll's picture
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Howdja know Joe?

troll's picture
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pratoman wrote:Howdja know Joe?I had my "CFP detector" turned on......

EDJ4now's picture
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pratoman wrote:Indy4Life wrote:EDJ4Now:
 
First, congrads on leaving the cult.  I left 3 years ago and have never looked back.  Second, it is not illegal to move money from a UGMA to a 529 as long as the assets in the 529 are designated as former UGMA monies.  My state plan (Putnam in Ohio) will do this.  If I recall, EDJ would not allow this because the rules were foggy but there is no problem with it as long as the money is earmarked as such.
However, the 529 designated as former UGMA money, retains most of the characterisitcs of an UGMA, i.e. irrevocable gift, etc.
 
This is what I meant, although I may have not stated it clearly.  When I talk to my clients I use my hands alot and get the client involved in the conversation, sometimes in a written monologe (sp) my style doesn't translate very well. 
 
Point being, now little Susie can spend her 529 on blow and a new porsche, and there isn't anything grandpa can do about it, plus she pretty much screwed herself out of financial aid. 

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